Doom and Gloom: What foreign firms are told about South Africa
- Simon Allison
- South Africa
- 07 Mar 2016 08:30 (South Africa)
Even for those of us who know the country well, these are uncertain times in South Africa both politically and economically. So how are foreign investors meant to make head or tail of what’s going on? They turn to risk analysis firms for advice. And that advice might explain why the likes of Barclays are cutting their losses. By SIMON ALLISON.
Investing overseas is not easy. You have to know what you’re doing, and the risks involved in doing it. And if you don’t know, you have to hire someone – and they don’t come cheap – to tell you what those risks are, and how to avoid them.
This is where risk analysts come in. In an increasingly globalised yet unstable world, risk analysis is a booming business, especially for companies looking to put their money into developing nations. Often, the advice of risk analysts is a primary determining factor when it comes to if, when, and how much investors are willing to stake in unstable markets. Their information can determine how entire countries or even continents are perceived by foreign investors.
In other words, what risk analysts think — and what they tell their clients — is important. So what do they think about South Africa?
This is not an academic question. Last week, Barclays announced it was pulling out of its African operations, including its stake in Absa. On Monday, The Times reported that South Africa’s super-rich are taking their money out of the country, weary of its economic future. There’s a lot of money at stake at the moment, and risk analysts play a crucial role in determining whether it stays in South Africa — or stays away.
Control Risks is one of the most influential risk analysis firms. The UK-based company has thousands of clients around the world, including plenty of blue chip multinationals, and they work in far-flung locations across the globe. Including, of course, South Africa.
In a briefing in Johannesburg on Monday, the company outlined its top five risks for South Africa, painting a bleak picture of a stagnating economy and uncertain political future. This is the broad-brush picture that foreign companies looking to invest in South Africa — or worried about maintaining there existing investments here — will be receiving.
Risk one: South Africa’s bonds will be downgraded to “junk” status
An increasingly inevitably outcome, given the failure of factions within the government and the ruling party to sing from the same song sheet. Ultimately, ratings agencies are looking for reliability, and as long as they keep receiving mixed messages they will have no choice but to score South Africa lower.
Risk two: The government, and the ruling party, won’t be able to deliver on their promises
This applies equally to investors hoping that the government will live up to the pro-business ideas outlined in Finance Minister Pravin Gordhan’s budget speech and to the many citizens still waiting for meaningful socio-economic change more than two decades after the end of apartheid. The latter is of particular concern, given the potential for social unrest — unrest that is already manifesting in service delivery and student protests.
Risk three: The prevalence of white collar crime and corruption
While South Africa has plenty of excellent legislation, enforcement is patchy. It doesn’t help that the police and prosecuting authority have become politicised, undermining their effectiveness and their ability to uphold the rule of law.
Risk four: Cyber vulnerabilities
South Africa is in no position to defend itself or its businesses against cyber crime. Last year, more than R2-billion was lost to cyber crime, making this a major criminal threat. In fact, South Africa is the most targeted country in Africa. Unless the government works with businesses to educate them, and initiates some kind of protection programme, it won’t make up the ground already lost against the hackers — leaving both companies and individuals vulnerable.
Risk five: The loss of perspective
In some ways, argues Control Risks southern African managing director George Nicholls, South Africa is its own worst enemy. The doom and gloom headlines and incessant soul-searching makes the country seem like it is in a lot more trouble than it actually is. “We have a strong constitution that’s rigorously defended, we are a strong constitutional democracy. When you look at the countries around us there’s a lot to be positive about, and the weakening rand gives us more opportunities.”
But if South Africans can’t maintain perspective about their own problems, they can’t expect foreign businesses to either.
The bottom line, from the risk analysts’ perspective: South Africa is still a good place to do business. There’s plenty of money to be made here, although it is more the slow and steady variety rather than the stratospheric returns often associated with developing markets. But there are serious problems, and they are largely of our own making. If investing is a confidence game, which all too often it is, we’re selling ourselves short — even though South Africa’s fundamentals aren’t as bad as we like to tell ourselves. DM
Photo: President Jacob Zuma is seen during a visit to the Kwanyamazane township with the ANC's 102nd birthday celebrations in Nelspruit, Mpumalanga, Wednesday, 8 January 2014. Picture: SAPA stringer.